Country A can produce 10 units of cloth or 5 units of wine in a day. Country B can produce 6 units of cloth or 4 units of wine in a day. Which country has the comparative advantage in the production of cloth and wine?

Solution

Comparative advantage is determined by comparing the opportunity costs of producing goods between countries. Opportunity Cost Calculation:

• Country A:
• Opportunity cost of 1 unit of cloth = 5/10 = 0.5 units of wine
• Opportunity cost of 1 unit of wine = 10/5 = 2 units of cloth
• Country B:
• Opportunity cost of 1 unit of cloth = 4/6 = 0.67 units of wine
• Opportunity cost of 1 unit of wine = 6/4 = 1.5 units of cloth

• Country A:
• Lower opportunity cost in producing cloth (0.5 < 0.67)
• Country B:
• Lower opportunity cost in producing wine (1.5 < 2)